Rybczynski theorem (1955)

Named after Polish-born English economist TADEUSZ RYBCZYNSKI (1923-1998), Rybczynski theorem posits that when one of two factors of production is increased there is a relative increase in the production of the good using more of that factor.

This unfortunately leads to a corresponding decline in that good’s relative price.

Source:
T Rybczynski, ‘Factor Endowments and Relative Commodity Prices’, Econometrica NS, vol. XXII (1955), 336-41

Relationship between endowments and outputs

The Rybczynski theorem displays how changes in an endowment affects the outputs of the goods when full employment is sustained. The theorem is useful in analyzing the effects of capital investment, immigration and emigration within the context of a Heckscher-Ohlin model. Consider the diagram below, depicting a labour constraint in red and a capital constraint in blue. Suppose production occurs initially on the production possibility frontier (PPF) at point A.

Suppose there is an increase in the labour endowment. This will cause an outward shift in the labour constraint. The PPF and thus production will shift to point B. Production of clothing, the labour-intensive good, will rise from C1 to C2. Production of cars, the capital-intensive good, will fall from S1 to S2.

If the endowment of capital rose the capital constraint would shift out causing an increase in car production and a decrease in clothing production. Since the labour constraint is steeper than the capital constraint, cars are capital-intensive and clothing is labor-intensive.

In general, an increase in a country’s endowment of a factor will cause an increase in output of the good which uses that factor intensively, and a decrease in the output of the other good.

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